Confluent (CFLT 2.98%), the former cloud division of LinkedIn which was spun out into an independent company in 2014, went public on June 24, 2021. It priced its IPO at $36 per share, opened at $44 on the first day, and hit an all-time high of $93.60 on Nov. 5, 2021.
Yet Confluent's stock only trades at around $35 today. The bulls retreated as its fiery growth cooled off, bottom-line losses widened, and rising interest rates popped the stock's bubbly valuation. That roundtrip back to its IPO price is discouraging, but could it actually represent a millionaire-making opportunity for patient investors?
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Assuming you invested $50,000 in Confluent today, you would need it to generate a 20-bagger gain to reach $1,000,000. So this $10 billion market cap would need to grow into a $200 billion one -- which would put the company in the same weight class as cloud giants like Adobe and Salesforce. Let's review Confluent's growth rates and valuations to see if it's even possible.
How fast is Confluent growing?
The company's software platform processes "data in motion" in real-time as it flows between an organization's different applications and services. That sets it apart from older cloud-based analytics companies which only process static data points. In its S-1 filing, Confluent claims this approach can make it the "central nervous system for modern digital enterprises" as it makes "data in motion core to everything they do."
The business model is built around Apache Kafka, an open-source software platform that was initially developed to process messages and data streams for LinkedIn. Kafka's developers founded Confluent after realizing they could provide Kafka as a service to other companies.
Confluent isn't the only real-time analytics platform that connects to Kafka, but its first-mover advantage in the space -- and the fact that it's still led by one of Kafka's original developers -- makes it the clear leader in this niche market.
Between 2019 and 2022, Confluent's revenue grew at a compound annual growth rate (CAGR) of 58%, while its total number of larger customers which generated more than $100,000 in annual recurring revenues (ARR) nearly tripled from 337 to 991.
But in 2023, it only expects its revenue to grow by roughly 30% as the prevailing macro headwinds force companies to rein in their spending on software upgrades. Analysts expect its revenue to grow at a three-year CAGR of 29% from $586 million in 2022 to $1.24 billion in 2025.
How much larger can Confluent grow?
According to Maximize Market Research, the global event stream processing market could expand at a CAGR of 21% from 2023 to 2029. But Confluent will also face a lot of competition in this growing market from tech giants like Amazon, Microsoft, and IBM -- which all integrate Kafka into their own cloud-based platforms -- as well as other smaller Kafka-as-a-service providers like Cloudera. Larger companies can also build their own data monitoring tools with Kafka instead of paying for Confluent's services.
Confluent is still deeply unprofitable, and all that competitive pressure could prevent it from ever breaking even. Confluent's net loss widened from $343 million in 2021 to $429 million in 2022, and analysts expect it to lose about $300-$400 million each year through 2025.
For Confluent to grow its annual revenues by 20 times from $586 million in 2022 to $11.7 billion in 20 years, it would need to maintain a CAGR of 16%. That growth rate seems achievable, but Confluent would still need to maintain its current valuation of 13.5 times forward sales to achieve a 20-bagger gain.
That price-to-sales ratio would arguably be too high for a company that is only generating mid-teens revenue growth. If we assign it a more realistic forward price-to-sales ratio of five, Confluent would need to generate $40 billion in revenues to reach a $200 billion market cap -- which would require a CAGR of 16% over the next 28 years.
Could Confluent make you a millionaire?
If Confluent keeps growing and expanding through smart acquisitions, it might have a shot at achieving a 20-bagger gain in two to three decades. But that path is twisting and narrow, and it needs to prove that it can turn a profit, scale up its business, and stay relevant in a crowded market as larger tech companies expand their cloud-based ecosystems. Its high valuations could also limit its gains as its revenue growth cools off.
Confluent might eventually be a millionaire-maker stock for very patient investors. However, I'd rather stick with other more promising growth stocks instead of betting on Confluent's ability to gradually grow beyond its niche of data in motion services.
